ISSUES IN CANADA
Prepared by John Christopher
Science and Technology Division
AIR: NEW BILATERAL AGREEMENTS
Proposed Merger of CN and CP Rail in Eastern Canada
Grain Transportation Act (WGTA)
The Future of VIA Rail
D. High Speed
Rail Passenger Services
1. Quebec City-Windsor
High Speed Rail Link
NATIONAL INFRASTRUCTURE PROGRAM
A. The Canadian
Coast Guard (CCG)
B. The Jones Act
ISSUES IN CANADA
Since the building of the
transcontinental railway in the 1870s, transportation has played a symbolic
and tangible role in the development of this nation. From its very beginning,
Canada has had to overcome many obstacles, not the least being geography.
In establishing this country, Canadians linked communities by rail, road
and air networks, over and across some of the world's toughest terrain,
at the same time building a port and marine infrastructure to enable their
products to reach world markets. Thus, in meeting the challenges of geography
and international trade, Canada became a recognized world leader in transportation.
A new transportation and
economic environment (NAFTA and GATT) and the changing needs of shippers
have, however, dramatically increased the competitive threat to the Canadian
transportation industry. While the individual sectors of the industry
all enjoy a strong reputation for quality and value, they have, for the
most part, pursued their interests independently of one another; the result
is a fragmented national transportation system that is less efficient
than it could be.
Increasingly, the key sectors
of the industry have called for more cooperation and integration to create
a coordinated, competitive and reliable system that can collectively promote
and enhance overall quality and efficiency.
In addition to the central
question of developing a unified policy framework, a number of other issues
need to be addressed. These include: open skies, cost recovery, the proposed
CN Rail/CP Rail merger in eastern Canada, the future of VIA Rail and the
Canadian Coast Guard, the Western Grain Transportation Act, high
speed rail passenger service, a national highway infrastructure program
and the implication of changes to the Jones Act.
NEW BILATERAL AGREEMENTS
Since 1949, Canada-U.S.
transborder air services have been governed by a series of bilateral agreements
which apply to passenger and cargo services. In response to pressure from
both countries for a new agreement that would allow for expanded, more
competitive transborder air services, Canada and the Unites States began
negotiating a new bilateral air agreement in April 1991. These negotiations
have been termed "open skies" because they are attempting to
"open" the skies to more flights between more destinations.
A Special Committee of the House of Commons studied this issue in 1990
and identified three negotiating options: liberalization, open skies and
open skies with cabotage.
Liberalization would mean
the negotiation of a revised, updated air agreement that would be more
pro-competitive, flexible and expansive. It would involve the exchange
of various routes between city pairs and might well include continued
regulation, as well as a formal process by which the two countries would
designate carriers to operate on specific routes. Simply put, liberalization
would imply the negotiation of a route-specific regime--much the same
as we have now.
Under an open skies policy,
any Canadian or U.S. airline found fit to do so by its respective aeronautical
authority could offer service on any transborder route at any time. This
policy would mean the virtual deregulation of the transborder market,
thus allowing for a market-driven regime.
The third scenario is open
skies with cabotage. Cabotage, sometimes known as the seventh freedom
of the air, is the freedom for an airline to carry domestic traffic within
a foreign country. For example, a "right-of-cabotage" would
exist if an Air Canada plane flying to Chicago and then on to Los Angeles
had the privilege of picking up passengers in Chicago and carrying them
to Los Angeles. This would mean unrestricted, integrated competition for
carriers of both countries, in both countries.
Since the negotiations began,
one of Canada's major priorities has been to obtain a phase-in period
whereby our airlines could operate on certain routes between major Canadian
centres and American points for several years before any U.S. carrier
could serve the same routes. The Canadians want a longer transition period
than is favoured by the Americans. Another Canadian priority is to obtain
guaranteed access (including favourable slots and gates) to major U.S.
hubs such as New York and Chicago, which are at present controlled by
American carriers. Because almost all U.S. airports are operated by local
authorities, the American government is arguing that it cannot impose
guaranteed access. Finally, the Canadians would like to have a dispute
settlement mechanism, similar to the panel used in Free Trade Agreement
disputes, to resolve air transport disputes between the two countries.
At present, these negotiations are on hold until the Clinton Administration
in Washington appoints a new U.S. negotiator.
As noted earlier, during
the fall of 1990 a Special House of Commons Committee studied proposals
for a Canada-United States Air Transport Agreement with the aim of providing
broad objectives and guiding principles to the government in developing
its negotiating strategy. The Committee held public hearings across Canada
and travelled to Washington, D.C., in order to canvass the views of communities,
provinces, the aviation industry, labour groups, the business community,
the tourism industry, and the shipping and travelling public. In its report
of January 1991, the Committee called for a new transborder air agreement
that, among other things, would have a phase-in period, ensure the continued
viability of our airline industry, guarantee competitive access for Canadian
carriers to U.S. airports, and maintain our high safety standards.
Since these negotiations
began two years ago, much has happened in the North American airline industry.
In the United States, carriers have gone bankrupt, the surviving carriers'
debts have risen, and services have been consolidated. In Canada, our
two national carriers have faced huge debt loads and decreasing revenues.
Both Canadian Airlines International and Air Canada have now entered into
agreements with U.S. carriers with regard to equity participation and
When the Standing Senate
Committee on Transport and Communications began its study of open skies
in June 1993, it heard testimony from Canada's Chief Air Negotiator, Daniel
Molgat, on the transitional approach to open skies; equal airport access
for both countries; creation of a dispute resolution system similar to
that in the Free Trade Agreement; and enhanced customs and immigration
pre-clearance procedures at Canadian airports.
The negotiations begun in
April 1991 had at least 12 rounds before being suspended in December 1992,
primarily because of the election of a new President and hence, a new
Administration. No formal negotiations took place in 1993, mainly because
the new Administration was slow to appoint a new chief air negotiator
and develop a negotiating strategy. A high level Presidential Commission
made a quick study of the state of the U.S. airline industry and submitted
recommendations to the President in August 1993. These recommendations
acknowledged that a multi-lateral, rather than a bilateral approach, might
well be the option for future air agreements.
Pressure has been building
in some quarters (mainly from interest groups and business and tourist
organizations) for a reopening of negotiations; earlier this year the
U.S. Secretary of Transportation, Federico Pena, announced the same goal.
Canadian airlines are approaching such suggestions with a great deal of
caution; unless our carriers have the necessary safeguards in place, they
are not anxious to enter into a new era of open skies. The House of Commons
Standing Committee on Transport, as part of a Tripartite Air Study (TAS),
plans to examine the status of bilateral air negotiations between Canada
and the United States.
Proposed Merger of CN and CP Rail in Eastern Canada
Some months ago, CN and
CP announced that they were developing a plan to merge their freight networks
east of the Manitoba border. Senior officials in both companies have stated
that the railways face a grave crisis and that without dramatic action
Canada will no longer have a viable, competitive, Canadian-owned national
railway system. With respect to their eastern operations, the two railways
have sustained losses of $2 billion over the past five years, as a result
of competition from trucks and U.S. railways combined with the recession.
Most of the country's manufactured goods, products best suited to shipping
by truck, are made in eastern Canada, while its natural resources such
as wheat, coal and potash, best shipped in large volume by rail, are found
in the west. The two railways met with the Minister to outline their merger
proposal for rail rationalization in eastern Canada. The Minister instructed
them to bring a detailed plan back to him for consideration.
After more than six months
of talks, negotiations broke down in July 1944, mainly because the two
railroads were far apart in their valuation of each other's assets. While
refusing to divulge actual valuations, CN believed that its larger eastern
operations were worth $650 million more than those of CP. CP Rail now
proposed to purchase CN's operations east of Thunder Bay.
On 22 September 1994, CP
Rail System (CPRS) made CN North America and the government of Canada
a $1.4 billion offer, financed by Canadian Pacific through existing resources,
to enter into an agreement in principle to purchase CN's railway operations
east of Winnipeg and Chicago. Under the proposal, CN would continue to
have its own rail link between Winnipeg and Thunder Bay and would be able
to compete for eastern rail traffic through a special access agreement.
CPRS's proposal includes
acquisition of not only fixed plant and facilities but also an appropriate
portion of CN's locomotive, freight car and intermodal container fleet.
The offer does not include non-rail businesses such as CN real estate
or the CN Tower in Toronto. CPRS said its offer would be open for 90 days,
with the purchase proposal subject to governmental approval and to a satisfactory
"due diligence" review of the business. It calls for the government
to consider an expedited process to obtain the required Canadian reviews
and to permit the transfer of assets, the construction of rail connections
and the eventual abandonment of surplus assets, as well as to determine
appropriate bargaining units for labour contracts. The offer contemplates
negotiating final agreements, which would be subject to the approval of
the boards of directors of CP and CN, with 1 January 1996 as the effective
date of the purchase.
Under the proposal, CPRS
would offer employment to all CN employees directly involved in the business
at the time of closing. Unionized employees would be integrated under
the terms of the Canada Labour Code and in accordance with established
contractual obligations. Seniority lists would be dovetailed and new collective
agreements reflecting different work rules on CPRS would be negotiated.
Transferred CN employees would come to CPRS with the same salary, benefit
levels, and pension arrangements.
The number of jobs would
be reduced gradually over a three- to four-year period, with CPRS being
responsible for severance costs. By the year 2000, the total workforce
in the east could drop to approximately 16,500 people, a reduction of
2,500 from the level expected by the end of 1995. CPRS would assume the
obligation to make employment security payments to CN workers laid off
from the eastern business prior to the acquisition.
CPRS's purchase offer includes
a special renewable 20-year eastern access agreement with CN. It is designed
to give shippers in the east continued access to competitive rail alternatives
for freight business moving between eastern and western Canada. The agreement,
the details of which are subject to negotiation, is similar to haulage
arrangements used widely in the United States but is unprecedented in
its scope and the market access it would provide.
Specifically, the access
agreement would apply to all CN traffic moving between western Canada
and areas within a 30-kilometre radius of Toronto and Montreal. CN would
still continue to be able to compete with CPRS for western Canada traffic
from the auto manufacturers in Oshawa and Oakville and to interline its
traffic with that of CPRS and other railways at Toronto and Montreal.
Under the agreement, CPRS
would provide CN with all services normally associated with handling traffic,
including line-haul transportation, switching at customer sidings, movement
of empty rail cars and interchange services. CN would be responsible for
providing rail cars and would be free to market and price its own services.
This would give shippers and receivers in eastern Canada competitive access
to both railways.
The fees charged by CPRS
would be negotiated with CN on the basis of the current average cost of
handling the traffic. The two railways would establish binding service
criteria for the various types of traffic. The agreement would also permit
CN to provide special services to its customers, including dedicated single-commodity
trains and multi-modal services.
The terms of the proposed
access agreement, including rate levels, would be subject to readjustment
every five years. If the merged operations and increased traffic volumes
lowered overall costs, the haulage rates could be reduced accordingly.
Any disputes would be resolved through arbitration.
Some, including the Minister
of Transport, have asked whether the railways should also be considering
this option for their operations west of Winnipeg. Obviously, the operation
of a single railway in eastern Canada would affect the entire system of
both railways, with respect to scheduling, freight routings, and freight
rate structure. Would there be sufficient traffic for two railroads to
continue to operate profitably in the west? For example, if we continued
to see an increase in the amount of grain moving into the U.S., would
it be carried by rail or truck? With shorter distances involved, trucking
might become a more attractive option. Also, if the Western Grain Transportation
Act is changed so that the subsidy is paid to the producer, rather
than directly to the railways as is now the case, producers might be in
a better position to negotiate cheaper rates with truckers on the short
haul routes (see below).
Moreover, as a result of
NAFTA, more products may move in a north-south direction for short hauls
to U.S. destinations close to the border. All these factors could mean
less traffic for the railways in the years ahead. Also to be considered
is the impact of directional shifts of traffic and loss of traffic (especially
of grain) on the Port of Vancouver. More freight traffic moving in a north-south
direction could result in less grain and fewer raw materials from the
west passing through the port. Also, if more grain is trucked south, less
grain will be shipped by rail to Vancouver. These diversions could have
a serious impact on the future of the Port of Vancouver and should be
looked at carefully when decisions are being made on the merging of railways
in western Canada and changes to the Western Grain Transportation Act.
Grain Transportation Act (WGTA)
The movement of grain by
rail to export positions is likely the most regulated transportation in
Canada. Since 1897, when the Crow's Nest Pass Act was passed, the
government has regulated and controlled grain freight rates. By the 1970s,
there was a substantial gap between these statutory rates and the actual
costs of shipping grain. The railways were sustaining huge losses and
the situation was critical.
The government's response
was to enact the WGTA in 1983. This provided for the continued regulation
of freight rates and an annual subsidy to the railroads based on the difference
between what the producer paid to ship his grain in 1982 and the actual
cost of shipping grain in that year. The subsidy, currently $720 million,
is called the "Crow Benefit." For the crop year 1992-93 the
total freight rate is $32.12 per tonne, of which the producer's share
is $11.98 and the government's $20.14. The WGTA rate-setting formula envisages
that, as the cost of moving grain rises and the volumes increase, the
government's share will remain unchanged, except for an inflation adjustment.
As a result, the producer will pay an increasing proportion of the annual
freight rate for shipping grain.
One issue is whether the
subsidy should continue; in these times of fiscal restraint, it is asked
whether the government can afford to pay it. Overshadowing that concern
is the question of whether such an "export" subsidy would be
permissible under new GATT arrangements. It is suggested that paying the
"Crow Benefit" to the producer, rather than the railways, would
increase the efficiency of the entire grain handling and transportation
system, significantly expand western livestock production, aid western
Canadian diversification efforts, without seriously reducing total grain
The Future of VIA Rail
Since January 1990, when
50% of its network was cut, VIA Rail has significantly reduced its subsidy
while improving services both in the Quebec City-Windsor corridor and
on the transcontinental route. It appears, however, that subsidy reduction
cannot continue without a major cut in services. Conversely, an expansion
of VIA services would require a higher subsidy. Currently, the government
is considering whether it should reduce the very high subsidization of
VIA's remote services. There is no possibility that VIA will make enough
money to pay itself for the costly new equipment and locomotives needed
before the end of the decade; is the government prepared to pay for these?
Large reductions to subsidies
during the past year have led VIA to examine the future of some of its
services. In 1995-96, the federal subsidy to VIA will be reduced from
$331 million to $281 million and to $233 million in the following years.
In response to this, according to recent reports in the press, VIA is
planning to eliminate up to eight of its passenger routes countrywide.
The following routes have been mentioned: Montreal-Saint John-Halifax;
Jasper-Prince Rupert; Toronto-Sarnia; Toronto-Niagara Falls; Sudbury-White
River; Montreal-Gaspé; Montreal-Jonquière; and Winnipeg-The Pas.
D. High Speed Rail
1. Quebec City-Windsor
Over the past few years,
there has been considerable debate on introducing high speed rail passenger
services (HSR) in the Quebec City-Windsor corridor. The European experience
demonstrates that there are really only two HSR technologies. One is designed
for upgraded, existing electrified track (the Swedish X-2000 train) and
the other for new, dedicated electrified right-of-way track (the French
TGV). While the infrastructure costs for the X-2000 are less expensive
than for the TGV, both options would require substantial capital funds.
Canadian studies have demonstrated
beyond doubt that HSR in the corridor is technologically feasible; however,
as in Europe and Japan, government funding would be required for the construction
of infrastructure. The Standing Committee on Transport, in its study on
HSR, recognized that the government would have to be involved in any high
speed rail project, there would not be a sufficient return for the private
sector to undertake it alone. The Committee recommended that the federal
government should not immediately make a financial commitment to the development
of HSR in the Quebec City-Windsor corridor. It must first be clearly demonstrated
that the public would reap substantial socio-economic benefits from such
a project (such as reduction of air pollution from automobiles and airplanes,
improved energy consumption, less airport and highway congestion and deferral
of significant public investment in highway and airport infrastructure).
Even so, the Committee concluded that such a project would require a "leap
of faith." It recognized, however, that the government might want
to proceed with high speed rail for other reasons, such as the need to
stimulate the economy. Here again, it should be noted that the recent
Report of the Royal Commission on National Passenger Transportation recommended
that "governments invest in high speed rail infrastructure only if
the benefits to the passenger transportation system exceed the costs,
and if taxpayers do not have to pay any operating subsidies."
A $6-million federal-provincial
private sector high speed rail study has also been launched but no report
is expected until at least late 1994. At that time, the federal government
will have to decide whether to make a financial commitment to "kick
start" the project. Meanwhile, over the next few months, the X-2000
will be in revenue service for AMTRAK in the U.S. northeast corridor (Boston-New
York-Washington). This demonstration project could affect the debate on
HSR in Canada.
High Speed Rail Link
The possibility of a high
speed rail service between Vancouver and Seattle is also being considered.
After a 13-year interruption, passenger service between Vancouver and
the United States is set to resume on 1 October 1994, a first step
towards an $800-million U.S. high speed service in the 750-kilometre corridor
stretching south to Eugene, Oregon. The U.S. government insisted on minimum
speeds and through service over the full length of the corridor to Vancouver
before granting funds.
Initially, AMTRAK, the operator
of the service, will use conventional bi-level rolling stock capable of
speeds of 125 kilometres an hour with a resulting travel time of 3 hours
and 55 minutes between Vancouver and Seattle. The goal is to have a high
speed train operating by 1997 that will achieve speeds of 200 kilometres
per hour and reduce the travel time to 2 hours and 45 minutes. The estimated
round trip fare is expected to be between $30 and $50 U.S.
To promote the service,
the high speed Spanish Pendular Talgo train, a lightweight eight-car train
carrying 200 passengers (two-thirds the capacity of a Boeing 747), has
been leased to the Washington State Transportation Department for six
months. Normally propelled by electricity from power cars that run in
front of and behind the coaches, the train will use a diesel locomotive
on the test run. The "Talgo" uses new tilt technology whereby
each axle supports vertical air cylinders from which opposing car ends
are suspended. This allows the car bodies to respond to centrifugal forces,
swinging outward on curves and then returning to the upright position
on straight stretches of track. For railways with older track this boosts
speed by 20% to 40%, without causing passenger discomfort.
Achieving the long-term
goal of 200 kilometres per hour on the run between Vancouver and Eugene
would require an estimated $1.8 billion for track upgrading and new signalling
technology. This amount is expected to be allocated as follows: $800 million
from the State of Washington; $450 million from Oregon; and $50 million
from British Columbia. Initially, Burlington Northern, a partner in the
venture, will pick up the estimated costs of between $1 million to $3
million U.S. for upgrading track in B.C. Further negotiations between
B.C. and the State of Washington will determine the province's ultimate
NATIONAL INFRASTRUCTURE PROGRAM
In 1991, the Council of
Transportation Ministers (federal and provincial) launched a comprehensive
highway policy study to identify a national highway system, define the
minimum design and service standards desirable, and provide costing options
for a four-lane route across Canada. The range of cost estimates runs
from approximately $12 billion to at least $18 to $20 billion. The study
also looked at the institutional and funding mechanisms used to build
roads in Canada and those used elsewhere in the world. The major question
is who should pay: the general taxpayer, or the users through a direct
tax and/or tolls. Another possibility is the privatization of road construction
and operation, as is being implemented for certain motorway routes in
There is a growing consensus
that the rebuilding of Canada's national highway infrastructure is essential
if this country is to compete, not only in North America but in the global
economy. Clearly, both levels of government will have to be involved in
paying for the program and the funding mix must be clarified. The federal
government and the provinces may well make a decision on a highway infrastructure
A. The Canadian Coast
The Canadian Coast Guard
is responsible for promoting safe, efficient and economical marine transportation
and navigation. Its main functions are the operation and maintenance of
marine navigation systems, ice breaking and Arctic operations, a marine
regulatory regime, search and rescue and 526 public harbours and ports.
According to the Estimates for 1992/93, there are approximately 6,000
Coast Guard employees with a budget of $650 million and a vessel complement
of 80 large vessels, 354 inshore work and rescue boats, 35 helicopters,
3 hovercraft and one fixed wing aircraft. Cost recovery levels for these
services are very low.
The challenge for the CCG
has been to control its costs and carry out its activities more efficiently
with fewer resources. A major part of its operating budget and capital
expenditures is devoted to its fleet. The CCG is implementing a three-year
major fleet restructuring plan to reduce crew sizes, decommission ships
and redeploy the remaining fleet so as to maximize efficiency and effectiveness.
One Coast Guard issue of
concern to the west coast is lightstation destaffing, which began as part
of a cost reduction program the late 1970s and early 1980s. At first,
destaffing was accomplished through attrition and retirement; however,
by the mid-1980s, the Department of Transport began to implement a policy
of active destaffing coinciding with the automation of lightstations across
Between 1970 and 1985, all
264 lightstations were automated, in some cases with remote monitoring
equipment, at a capital cost of $15 million; 57 lightstations were destaffed
on an "opportunity" basis, for example on the retirement of
Between 1985 and 1993, the
Canadian Coast Guard carried out a major project to install remote monitoring
equipment and destaff 137 more lightstations at a capital cost of $17
million. Many indeterminate lightkeepers retired, but those wishing to
continue their careers were placed in other jobs.
When, in March 1992, the
Minister of Transport directed the Coast Guard to defer further activity
on lightstation destaffing, Sand Heads lightstation in British Columbia
had already been destaffed for safety reasons. In January 1994, the Minister
approved the permanent destaffing of this lightstation.
Of the 70 staffed lightstations
now in Canada, 35 are on the west coast, 32 in Newfoundland, and three
in the Maritimes. Records for the 137 lightstations destaffed since 1985
show a current annual Operating & Maintenance saving of $7 million,
with a cumulative saving since 1985 of $32.6 million.
In the U.S., between 1968
and 1986 a total of 202 lightstations were destaffed; to date, the U.S.
has destaffed all but one of 475 lightstations. New Zealand has destaffed
all of its 42 lightstations. Destaffing should be completed in Australia
by 1995 and in the U.K. by 1997.
In Canada, the Coast Guard
has initiated a full strategic review and restructuring of all operational
programs, including destaffing. The Coast Guard's mission is to contribute
to a safe, environmentally sound marine transportation system. A number
of issues have been raised by the public (e.g., users of the service such
as recreational boaters and commercial shipping). Their main concern is
a possible decline in the safety-related services at destaffed lightstations,
rather than the reliability of automated aids to navigation. They ask
who, in the absence of lightkeepers, will spot mariners in distress for
Search and Rescue (SAR) teams, give boaters up-to-the-moment information
on marine weather and local sea conditions, and report aviation weather
at local lightstations. These are all important issues for the Coast Guard
to address in its review of its operational program for lightstation destaffing.
B. The Jones
Under the Jones Act,
all goods carried by water between U.S. ports must be transported by American-owned,
American-built and American-crewed ships. Canada's shipowners, convinced
that they could compete in an open North American market, unsuccessfully
tried to put the Jones Act on the table at the time of the Free
Trade negotiations; another effort, made during the North American Free
Trade negotiations, was no more successful. Our shipowners continue to
press the case for "open waters" negotiations. The Jones
Act has, however, provided one major benefit for the Port of Vancouver.
To reserve domestic trade for American ships, the Act prevents foreign
ships from making two consecutive stops at U.S ports. For example, if
a foreign cruise makes a stop in Seattle it cannot go on to make a second
stop in Alaska. Thus, foreign cruise ships choose to follow the scenic
voyage to Alaska after stopping in Vancouver, which as a result has a
virtual monopoly on Alaska cruises. There is, however, mounting pressure
from Seattle and the State of Washington to have the Jones Act
amended to allow foreign ships to make more than one stop at U.S. ports.
Fewer ships might then stop at Vancouver, with serious economic consequences
for the port.